Cryptocurrencies. Past, Present, And Future

Dating back to 1992 when computational puzzles were first introduced, and then in 2009 when the first digital currency appears after the financial crisis and people started losing confidence in the standard currencies to disrupt world economies, Cryptocurrencies are part of the tidal wave of disrupting technology that is becoming inexorable to governments worldwide.  Moving from less than $0.01 to around $66k in almost a decade with a current global market cap of $2.33 T creates a heated debate among policymakers. A cryptocurrency is defined as a group of binary data that is considered as a medium of exchange where an individual owns coins on a computerized database using cryptography to secure transaction records, creation of additional coins, and verify the transfer of coin ownership. The top 10 cryptocurrencies in the market are[1]:

Despite the vast array of financial benefits that include transparency, instant transactions, Cryptocurrencies are associated with financial, economic, and environmental risks. These disadvantages include Nonregulation, Cybersecurity Issues, High Energy Consumption, and High Price Volatility. This article will tackle the possible reasons for governments studying the adoption of cryptocurrencies as a parallel digital legal tender and its associated perils.

In late August 2021, El Salvador became the first country to legalize Bitcoin. El Salvador is fervently devoted to Bitcoins; the country is planning to build the first Bitcoin City funded by Bitcoin-backed bonds. President Nayib Bukele believes that this move would increase the money supply and reduce the transaction costs in the country, as it offers swifter and cheaper cross-border payments. Other countries, as well, have embraced the new technology. UAE, for instance, licensed companies to offer, issue, list, and trade crypto assets in Dubai Multi Commodities (DMCC)[2]. In addition, Regal RA, an international gold investment company, offers at DMCC the first deep cold storage for crypto assets for its investors[3]. Moreover, it is not illegal to trade in cryptocurrency in the United States of America, and crypto-assets are even taxed; however, the government has cautioned the users of cryptojacking and malware.

On the other hand, other countries and the International Monetary Fund argue that cryptocurrency poses a potential risk to capital flows. For example, China, the main hub for crypto mining, announced the illegality of cryptocurrency transactions in September 2021 causing a fall in cryptocurrency prices. An example of the crash is the fall in Bitcoin prices during September 2021 is seen in the below graph[4].  

Source: Screenshot, TradeView (2021)

The anonymous nature of cryptocurrencies creates a suspicious environment for financial regulators. Identifying fraudsters who commit cryptojacking is arduous and a central intermediary is unnecessary; therefore, the crypto ecosystem is vulnerable to money laundering, terrorist financing, and cyber hacking. Consequently, there are several reported thefts, and due to their illegality and lack of statutory compensation agreements in most countries around the world, there is no assurance of recourse if stolen. The recorded cryptojacking attempts increase as their popularity increases, in which they reached more than 50 million attempts with an increase of 23% y-o-y in the first 2 quarters of 2021[5]. In 2019, for instance, a crypto miner was sentenced to prison in the US as his victims lost more than USD 9 Mn due to his digital Ponzi scheme in crypto trading[6]. The Securities and Exchange Commission (SEC) enforced a company with a penalty of USD 539 Mn for conducting illicit behavior and offering an illegal digital asset called G-Coins, last September[7].  

Powering mining burdens the economy and the environment as it consumes energy heavily. According to the Cambridge Bitcoin Electricity Consumption Index (CBECI), the share of the Bitcoin from the world’s total energy consumption, which accounts for two-thirds of the total energy consumed by cryptocurrencies, is .26% which is more than the total consumption of some entire countries. For example, Bitcoin uses 116.9 TWh per year compared to the usage of the Netherlands of 103.5 TWh per year. The below graph shows a significant increase in energy consumption in 2021 as mining increases[8].  

Source: Digiconomist (2021)

This huge energy consumption is associated with environmental hazards and electronic waste (E-waste). A single Bitcoin transaction emits 928.65 kgCO² which is equal to the emission of 2.06 million VISA transactions[9]. Moreover, the annual economic waste (E-waste) of Bitcoins alone is 27.64 kt which is equal to the small IT equipment waste of the Netherlands. Tesla, for example, used to accept Bitcoin as a payment method; however, the CEO has suspended such a decision due to its associated environmental hazards which caused the aggregate market of cryptocurrencies to fall by around USD 366 B.  

The scalability of some cryptocurrencies is another constraint facing investors. The volume of the transactions is constrained to a limited number of transactions per second; for instance, Bitcoins are limited to three transactions per second compared to thousands of transactions per second of cards using fiat currency. While other newly created cryptocurrencies; such as, Ripple has the capacity of 50k transactions per second overpassing the speed of VISA transactions.

Cryptos are associated with large bouts of price fluctuations, as seen in the below graph which shows the high volatility of Bitcoins in the past 5 years[10]. One reason might be that investors resort to holding their positions causing a shortage in supply; thus, expectations of increased prices. Higher price speculations decrease their supply in the market; thus, increasing the prices further. Also, the increase in the credibility of bitcoin as a transaction medium, ceteris paribus, causes prices to rise as well.

Bitcoin/ USD 2015-2021. TradeView (2021)

The uncertainty and lack of sufficient knowledge and historical experience with the new technology instigate a high risk of cybercrimes including theft, fraud, money laundering, and financing illegal activities. However, as regulations and statutory reforms become implemented, investors and governments might consider cryptocurrencies as a legal alternative tender in the future.

As aforementioned, the risk of trading in cryptocurrencies is high as it still raises many doubts among investors. Also, the continuity of some cryptocurrencies is provisional as it lacks a proper intrinsic value. For example, one currency that was named after the famous Squid Game series is relatively disappearing; it has seen a huge drop of around 83 % during 2 months only, as seen in the chart below. This huge crash shows the vulnerability of such currencies, if they were backed up by actual assets, the case would have differed.

SQUIDUSD. Trading View

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